Much Sound and Fury Signifying Nothing? | Russell T. Rudy Energy LLC
At least one industry observer sees the recent agreement to cut production as having “…no significant impact on the direction of oil markets in 2017 and beyond.” In a recent article in “Oil Voice”, author John Richardson makes his case that oil markets in the future will be weaker, rather than stronger, unless there is major geopolitical upheaval.
Richardson anticipates a global recession next year as a result of a stronger U. S. dollar and higher interest rates as the domestic economy expands. The impact of a strong dollar, in and of itself, on oil prices is readily apparent: as the dollar strengthens, fewer dollars are needed to buy a barrel of oil. However, Richardson sees this as having an even more pernicious effect on oil markets next year.
The author sees Donald Trump’s election, and plans for infrastructure spending, creating a strong dollar and higher interest rates. This would attract more foreign investment to the U. S. and divert funds from emerging economies. He speculates that this could trigger a debt crisis in Turkey. Richardson contends that Turkey, like many emerging economies, has a great deal of foreign currency denominated debt, much of which is in dollars. As dollars become more expensive, it will take more lira to buy dollars to repay the debt.
Further, the problem could become so acute that the crisis would spread to other emerging markets. Worse yet, Richardson sees Trump’s aggressive policies leading to a trade war with China which could further depress demand. Since he sees global demand for oil at, or near, its peak, the downward pressure on crude prices would be irresistible.
As if falling demand were not bad enough, Richardson sees supply increasing, largely here in the U. S. Domestic shale producers are becoming increasingly efficient. Production costs per barrel are currently about half of what they were in 2014. As prices rise in response to the global production cutback, shale operators will increase production. This alone would create downward pressure on prices but, here again, Richardson sees Trump’s policies as further exacerbating the problem. If Trump cuts taxes and relaxes environmental regulations, domestic producers will respond with even more investment, and ultimately production. This incremental supply will only further depress prices.
Richardson admits that no one can predict the future with certainty, but speculates that in spite of the production freeze we will see collapsing demand in the emerging economies, surging domestic production, and $25 oil in 2017.
To read the article in its entirety, please go to https://www.oilvoice.com/Opinion/307/OPEC-Cutbacks-The-Case-Against-Any-Major-Impact- .
Russell T. Rudy Energy, LLC buys oil, gas and mineral interests nationwide. Please call (800-880-0940), or write (info@rudyenergy.com ) to let us know if you agree, disagree or would just like to comment on this, or any of our posts.
